Estimates of the informal economy in South Africa: some macroeconomic policy implications.

Abstract:

This study estimates the size of the informal economy in
South Africa, evaluates the macroeconomic implications of
this, and then concludes with possible effects that all of
this might have on policy. The research is conducted as a
South African case study, and uses time-series analysis for
the period 1966-2002.
Recently there has been a revival of interest in the
informal economies of a number of countries. The revival
has been driven largely by an increase in the size of
informal economies, in both absolute and relative terms.
South Africa is no exception to this trend: more and more
people are entering the informal economy. The rapid
urbanization of the black population, the slow pace of
economic growth, the decrease in the incidence of formal
employment, the promotion of small-, medium- and microenterprises
(SMMEs), as well, finally, as the so-called
‘informalization’ of formal businesses are all factors
contributing to the recent growth in the South African
informal economy.
There is not much literature on the South African informal
economy, and what there is tends to be narrow, specializing
in particular aspects of the informal economy. Moreover,
the subject is controversial: there seems to be little
agreement on the definition and use of informal economy
estimates in both economic analysis and policy-making.
In response to this situation, therefore, the present study
examines the problem of defining the informal economy and
considers the reasons why people might prefer to operate in
the informal economy rather than in the formal economy. By
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examining the various definitions of the South African
informal economy and by looking at the reasons why people
are operating in it, it is possible to gain an
understanding of the various approaches used in
international literature on the subject to measure the
economic contribution of informal economies. A critique of
the different approaches suggests that the currency demand
approach is an appropriate method for measuring the
informal economy in a developing country such as South
Africa.
The results of the analysis indicate that while the size of
the informal economy stood at an average of 9.5% of GDP for
the period 1966-2002, the size of the informal economy
during the period 1966-1993 decreased. After 1993, the
size of the informal economy remained relatively constant.
These estimates of size are then used to test the nature of
the relationships between the informal and formal
economies. It was found that the informal economy has
effects in, and on, the formal economy. This finding
suggests, ultimately, that an increase in the size of the
informal economy will ultimately contribute to an increase
in the growth of the economy as a whole.
These findings are used in the present thesis in the
formulation of policy recommendations regarding the
regulatory and macroeconomic policies currently in place in
South Africa. The recommendations cover many areas:
variable bias, monetary policy, fiscal policy and taxation,
capital markets, and employment policy. Areas for further
research are also indicated.
The study concludes that macroeconomic policy which largely
ignores or neglects the informal economy in its modelling
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and planning increases the likelihood that such policy may
be overly contractionary, or that it may have unintended
consequences. As a consequence, the South African informal
economy should be included in all macroeconomic models –
whether monetary, fiscal, or development models. The due
consideration of the informal economy takes on even further
significance in the South African context: it consists
largely of the formerly disadvantaged and vulnerable groups
of society – the very people who have been given priority
in the government’s broad medium-term macroeconomic policy
(i.e. GEAR). The estimates presented in this study should
therefore make a contribution to macroeconomic modelling
and planning.